Bitcoin Futures Criticized By Brokers For Overlooking Risks

Some of the world's biggest derivatives brokerages criticized plans by U.S. exchanges to offer bitcoin futures and options, saying the contracts have been rushed to market without proper consideration of the risks.

The brokerages, who laid out their concerns in an open letter via the Futures Industry Association on Wednesday, said exchanges failed to get enough feedback from market participants on margin levels, trading limits, stress tests and clearing. Highlighting bitcoin's elevated volatility and reliance on unregulated venues for pricing, the brokerages also questioned whether exchanges had the tools to prevent market manipulation.

Misgivings among the FIA's members, who include Goldman Sachs (GS) and JPMorgan Chase (JPM), underscore the controversy surrounding bitcoin as it moves from the fringes of finance toward the mainstream. CME Group (CME) and Cboe Global Markets (CBOE) both used an expedited self-certification process to approve the listing of bitcoin futures, hoping to tap investor demand after the cryptocurrency's more than 1,400% rally this year.

"A more thorough and considered process would have allowed for a robust public discussion among clearing member firms, exchanges and clearinghouses," the FIA said in its letter, which was addressed to the Commodity Futures Trading Commission and signed by FIA Chief Executive Officer Walt Lukken.

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While the letter is unlikely to change the exchanges' plans, it raises questions about how many brokerages will participate once bitcoin derivatives start trading later this month. Some dealers, particularly the so-called clearing members required to stand behind client trades, are concerned about their exposure if the cryptocurrency's extreme volatility leads to trader defaults. There should have been a public discussion about whether a separate guarantee fund — used to limit the impact of defaults — was warranted for the new contracts, the FIA said.

The exchanges were allowed to offer bitcoin products after pledging to regulators that they comply with the law. Cboe will start trading futures on Dec. 10, while CME's contracts are set to debut on Dec. 18. The products will be subject to CFTC oversight.

Bitcoin, which surged past $17,000 for the first time on Thursday before retreating Friday, has received mixed reviews on Wall Street. JPMorgan CEO Jamie Dimon has called the cryptocurrency "a fraud," while Lloyd Blankfein, CEO of Goldman Sachs, said recently that it's too early for his bank to need a bitcoin strategy. Franklin Templeton's Mark Mobius called it a bubble, but added that "bubbles can last a long time." Some hedge funds are waiting for futures to bet against it, more than half a dozen people trading the assets told Bloomberg News.

The FIA said its members have reservations about the reliability of prices underlying the bitcoin contracts. Some of the venues on which the cryptocurrency trades have suffered hacks and breakdowns. Bitcoin plunged nearly 20% in less than 90 minutes on Nov. 29 after reports of intermittent outages at cryptocurrency exchanges struggling to keep up with user interest.

Bitcoin is "a commodity unlike any the commission has dealt with in the past," CFTC Chairman Chris Giancarlo said in a Dec. 1 statement. "We expect that the futures exchanges, through information sharing agreements, will be monitoring the trading activity on the relevant cash platform."

CFTC spokeswoman Erica Elliott Richardson said that Giancarlo has been "clear that market participants should take note that the relatively nascent underlying cash markets and exchanges for bitcoin remain largely unregulated markets over which the CFTC has limited statutory authority, and that investors should be aware of the potentially high level of volatility and risk in trading these contracts."

Some brokerages are skeptical.

"We remain apprehensive with the lack of transparency and regulation of the underlying reference products on which these futures contracts are based and whether exchanges have the proper oversight to ensure the reference products are not susceptible to manipulation, fraud, and operational risk," the FIA said in its letter.

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